“October’s distinguishing feature is the poor covenant protection in the lowest-rated credits,” says Alexander Dill, head of covenant research at Moody’s. “For Caa-rated bonds, the historical relationship between ratings and covenant quality broke down in October after holding [in September].”

Of the bonds with Caa ratings, the lowest on the Moody’s scale, 31% are in the rating agency’s weakest covenant quality category, compared with 3.5% historically and 7.7% in September. The low average covenant quality scores were due largely to significant liens and structural subordination risk. Usually lower-rated bonds have stronger covenant packages than higher-rated bonds because investors expect weaker credits to offer more protection.

In the higher Ba and single B rating categories, October’s bonds showed improved covenant protection over those issued in September. But both private equity-sponsored and secured bonds showed worsening protection, with lower average CQ scores than in both September and historically.